Mandatory Disclosure Rules (MDR)

The United Kingdom (UK) has implemented the European Union (EU) Directive 2018/822 (DAC6) into domestic law through the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (the “Regulations”). The new legislation called the Mandatory Disclosure Rules (MDR), came into force on 1 July 2020. This in-depth article examines the implications of these rules, including the obligations they impose on taxpayers, intermediaries, and businesses.

I. Background

Purpose of DAC6 and MDR: DAC6 is an EU Directive implemented in response to the OECD’s Base Erosion and Profit Shifting (BEPS) project. The primary objective of DAC6 is to increase tax transparency and deter aggressive tax planning by mandating the disclosure of specific cross-border arrangements. Consequently, the UK’s MDR seeks to achieve these goals within its jurisdiction.

Timeline for Implementation: The UK’s MDR was enacted on 1 July 2020. However, due to the COVID-19 pandemic, the reporting deadlines for arrangements were extended. Under these extensions, reporting for arrangements between 25 June 2018 and 30 June 2020 was due by 28 February 2021. Reporting for arrangements between 1 July 2020 and 31 December 2020 was due by 30 January 2021. For arrangements made on or after 1 January 2021, the 30-day reporting window applies.

II. Scope and Application of the MDR

Disclosable Arrangements: The MDR requires reporting cross-border arrangements that meet certain criteria, referred to as “hallmarks”. These hallmarks are divided into five categories (A-E), each reflecting a different type of potentially aggressive tax planning strategy. The MDR applies to arrangements where at least one of these hallmarks is present, and in some cases, only if the arrangement satisfies the main benefit test (MBT).

The Main Benefit Test (MBT): The MBT is a key component of the MDR, as it determines whether certain arrangements must be reported. An arrangement satisfies the MBT if the main benefit, or one of the main benefits, that a person may reasonably expect to derive from the arrangement is obtaining a tax advantage.

Parties Subject to Reporting Obligations: The MDR imposes reporting obligations on “intermediaries” and “relevant taxpayers”. Intermediaries are defined as any person who designs, markets, organizes, makes available for implementation, or manages the implementation of a disclosable arrangement. Relevant taxpayers are any person who directly or indirectly participates in the arrangement and receives a reportable tax advantage.

Cross-Border Arrangements: For the MDR to apply, an arrangement must involve a cross-border element. This means that the arrangement must concern either more than one EU member state or an EU member state and a third country, with at least one of the following conditions being met:

• At least one participant in the arrangement is a tax resident in multiple jurisdictions.
• The arrangement involves a permanent establishment (PE) in one jurisdiction while the participant is a tax resident in another jurisdiction.
• The arrangement involves activities that impact the tax residence of a participant.
• The arrangement is connected to the automatic exchange of information or identifying beneficial ownership.

 III. Reporting Obligations

Intermediary Reporting: Intermediaries have a duty to report disclosable arrangements to HMRC within 30 days of the arrangement being made available for implementation or when the first step of the arrangement is implemented, whichever occurs first. The information to be reported includes:

• Details of the intermediary and relevant taxpayers, such as their name, tax identification number, and country of residence.
• Information on the disclosable arrangement, including a summary of the arrangement, the relevant hallmarks, the date of the first step of implementation, and the value of the arrangement.
• The national provisions form the basis for the tax advantage.
• The identification of other EU member states affected by the arrangement.

Taxpayer Reporting: Relevant taxpayers must report disclosable arrangements to HMRC in the following situations:

• When there is no intermediary involved in the arrangement.
• When the intermediary is protected by legal professional privilege, the intermediary must inform the taxpayer of their reporting obligation.
• When the arrangement was designed, marketed, organized, or made available by an intermediary outside the UK, the taxpayer is a UK resident or has a UK permanent establishment.

Taxpayers must report the same information as intermediaries and have the same 30-day reporting window.

Penalties for Non-Compliance: Failure to comply with the MDR reporting requirements can result in significant penalties. Intermediaries and taxpayers can face fines of up to £5,000 for non-compliance. In addition, daily penalties of £600 may apply for continued non-compliance after receiving a penalty notice from HMRC. In more severe non-compliance, penalties can be increased to up to £1 million or a percentage of the tax advantage gained from the arrangement, whichever is higher.

IV. HMRC Guidance on MDR

HMRC has issued comprehensive guidance on the interpretation and application of the MDR, which can be found in the International Tax Compliance Manual (INTM). Some key points of the guidance include:

Interpretation of Hallmarks: HMRC provides detailed explanations and examples for each hallmark, assisting taxpayers and intermediaries in determining whether an arrangement falls within the scope of the MDR.

The Main Benefit Test: The guidance clarifies that the MBT should be applied objectively, considering the arrangement’s relevant facts and circumstances. It also provides examples to help demonstrate when the MBT would be satisfied.

Legal Professional Privilege: HMRC’s guidance addresses the application of legal professional privilege in the context of the MDR, including the situations in which it may apply and the obligations of intermediaries and taxpayers when privilege is invoked.

Penalties and Reasonable Excuse: The guidance outlines the factors HMRC will consider when determining whether a person has a “reasonable excuse” for failing to comply with the MDR reporting requirements. It also explains how HMRC will assess penalties and provides examples of situations that may constitute a reasonable excuse.

Implementing the UK’s Mandatory Disclosure Rules represents a significant step towards increased tax transparency and deterring aggressive tax planning. By understanding the scope and application of the MDR, intermediaries, taxpayers, and businesses can ensure they are compliant with their reporting obligations and avoid substantial penalties.

In light of the complexity of these rules, taxpayers and intermediaries must analyze cross-border arrangements and seek professional advice carefully when necessary. HMRC’s guidance on the MDR serves as a valuable resource for understanding the intricacies of the legislation and the practical implications for taxpayers and intermediaries alike.

If you need more clarification on tax disclosure, please call our tax advisors on 08001357323 for specialist advice.